JAKKS Pacific Reports Third Quarter 2016 Financial Results

Revises 2016 Outlook, Continues to Expect Growth in Full Year Sales and
Adjusted EBITDA

SANTA MONICA, Calif.–(BUSINESS WIRE)–JAKKS Pacific, Inc. (NASDAQ: JAKK) today reported financial results for
the third quarter ended September 30, 2016.

Third Quarter Overview:

  • Net sales totaled $302.8 million;
  • Gross margin was 31.4%;
  • Operating margin was 11.4%;
  • Net income was $30.6 million, or $0.82 per diluted share;
  • Inventory levels declined 8% year-over-year.

Third Quarter 2016 Financial Results

Net sales for the third quarter were $302.8 million compared to $337.0
million in the third quarter of 2015. The decline was due to the
suspension of shipments by JAKKS to a major U.S. customer, the negative
impact of the Brexit vote and subsequent devaluation of the British
pound, a timing lag in international sales caused by shifting to
direct-to-retail distribution, and lower-than-expected sales of some
movie-licensed products.

Gross margin in the third quarter was 31.4%, up modestly from 31.0% last
year as a result of continuing margin expansion efforts, partially
offset by product mix shifts and the deleveraging effect of the decline
in sales. Operating margin was 11.4%, down from 13.2% last year due to
the sales decline and the deleveraging of fixed costs.

Reported net income attributable to JAKKS Pacific for the third quarter
of 2016 was $30.6 million, or $0.82 per diluted share, which includes an
aggregate of charges of $4.2 million, or $0.07 per diluted share,
related to the resolution of prior litigation and multi-year license
audit. This compares to net income attributable to JAKKS Pacific of
$45.8 million, or $1.12 per diluted share, in the same year-ago quarter,
which includes non-cash income of $5.6 million, or $0.09 per diluted
share, related to the reversal of previous earn-out accruals from our
2012 acquisition of Maui Toys. Adjusted EBITDA for the third quarter was
$42.8 million, down from $52.5 million in the year-ago quarter due to
the sales decline. See note below on “Use of Non-GAAP Financial

Management Commentary

“In the third quarter, most of our product lines performed as expected,”
said JAKKS Pacific Chairman and CEO Stephen Berman, “but we made the
decision to suspend sales to a major U.S. customer that is experiencing
challenges. In addition, the negative impact of the Brexit vote and the
subsequent sharp drop in the value of the British pound decreased the
purchasing power of our customers. The expansion of our direct-to-retail
international sales network also caused sales to be recognized later in
the year. Finally, we faced pressure from disappointing sell-through of
some licensed product lines tied to motion pictures which did not meet
expectations. Our gross margins, however, were relatively in line with
our internal forecast.”

“Domestically,” Berman continued, “we saw strong consumer demand during
the quarter for Tsum Tsum and Gift ‘ems collectibles, Nintendo figures
and plush, and Disney Princess products. We have strong expectations for
fourth quarter sales of several Disney properties, including Pixar’s
Moana movie-inspired toys, Elena of Avalor dolls and role play toys, the
Frozen Northern Lights Elsa doll, and Star Wars Rogue One Big-Figs™.
Many of our key driver toys, such as the Gift ‘ems Hotel & Spa, Disney
Princess Belle Tea Cart, Frozen Northern Lights doll, Elena of Avalor
Light Up dress, Scepter and Guitar role play toys have already received
top industry awards and been featured on lists of ‘hot holiday toys’
compiled by various industry experts.”

“Looking ahead to 2017,” concluded Berman, “we currently expect to see
revenue growth coming from three areas. First, our existing core
business should continue to benefit from the introduction of exciting
new products based on owned IP as well as licenses, and the continued
expansion into new geographies. Second, we recently announced the
acquisition of C’est Moi, a new and rapidly growing maker of skin care
and makeup products aimed at kids engaged in the performing arts. Third,
we have launched Studio JP, a joint venture with our Chinese
distribution partner Meisheng Culture & Creative Corp., to produce
high-quality, animated content based on owned IP. All three areas are
part of our ongoing effort to add faster growth and higher margin
sources of revenue to our sales mix. We have just finished our fall 2017
toy preview with customers from around the world, and we are also
encouraged by the positive response to both our spring and fall product

Working Capital

As of September 30, 2016, the Company’s working capital was $247.6
million, including cash and cash equivalents and restricted cash of
$48.2 million, compared to working capital of $271.6 million, including
cash and cash equivalents and restricted cash of $81.2 million at
September 30, 2015.

Revised 2016 Outlook

The Company has revised its previously issued outlook for 2016, which
had anticipated net sales of approximately $800.0 million, earnings of
approximately $0.78 per diluted share and Adjusted EBITDA of
approximately $65.0 million. For the full year 2016, the Company now
expects net sales to grow by 1% to approximately $755.0 million with
earnings to approximate $0.56 per diluted share and Adjusted EBITDA to
grow by 4% to approximately $53.0 million. By comparison, net sales in
2015 were $745.7 million with earnings of $0.71 per diluted share and
Adjusted EBITDA of $50.9 million. Reflected in the revised guidance is
gross margin for the full year of 31.8%, down slightly from our prior
outlook of 32.0%.

Share Repurchase

During the third quarter, the Company repurchased 172,751 shares of its
common stock at an aggregate cost of $1.5 million, or an average of
$8.69 per share, bringing the total amount returned to shareholders
through stock and convertible note repurchases to $29.3 million under
the $30.0 million program authorized in June of 2015.

Use of Non-GAAP Financial Information

In addition to the preliminary results reported in accordance with U.S.
GAAP included in this release, the Company has provided certain non-GAAP
financial information including Adjusted EBITDA which is a non-GAAP
metric that excludes various items that are detailed in the financial
tables and accompanying footnotes reconciling GAAP to non-GAAP results
contained in this release. Management believes that the presentation of
these non-GAAP financial measures provides useful information to
investors because the information may allow investors to better evaluate
ongoing business performance and certain components of the Company’s
results. In addition, the Company believes that the presentation of
these financial measures enhances an investor’s ability to make
period-to-period comparisons of the Company’s operating results. This
information should be considered in addition to the results presented in
accordance with GAAP, and should not be considered a substitute for the
GAAP results. The Company has reconciled the non-GAAP financial
information included in this release to the nearest GAAP measures. See
the attached “Reconciliation of Non-GAAP Financial Information.”

Conference Call Live Webcast

JAKKS Pacific will webcast its third quarter earnings call at 9 a.m.
Eastern Time/6 a.m. Pacific Time today. To listen to the live webcast
and access the accompanying presentation slides, go to www.jakks.com/investors
and click on the earnings website link under Presentations at least 10
minutes prior to register, download and install any necessary audio

A replay of the call will be available on JAKK’s website approximately
one hour following completion of the call through November 3, 2016,
ending at 11:59 p.m. Eastern Time/8:59 p.m. Pacific Time. The playback
can be accessed by calling 888-843-7419 or 630-652-3042 for
international callers, passcode “43551093” for both playback numbers.

About JAKKS Pacific, Inc.

JAKKS Pacific, Inc. (NASDAQ: JAKK) is a leading designer, manufacturer
and marketer of toys and consumer products sold throughout the world,
with its headquarters in Santa Monica, California. JAKKS Pacific’s
popular proprietary brands include BIG-FIGS™, XPV®, Max Tow™ and
Friends, Disguise®, Moose Mountain®, Funnoodle®, Maui®, Kids Only!®, as
well as a wide range of entertainment-inspired products featuring
premier licensed properties. Through JAKKS Cares, the company’s
commitment to philanthropy, JAKKS is helping to make a positive impact
on the lives of children. Visit us at www.jakks.com and
follow us on Instagram (@jakkstoys),
Twitter (@jakkstoys)
and Facebook (JAKKS

© 2016 JAKKS Pacific, Inc. All rights reserved.

Forward-Looking Statements

This press release may contain “forward-looking statements” (within the
meaning of the Private Securities Litigation Reform Act of 1995) that
are based on current expectations, estimates and projections about JAKKS
Pacific’s business based partly on assumptions made by its management.
These statements are not guarantees of future performance and involve
risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such statements due to numerous factors,
including, but not limited to, those described above, changes in demand
for JAKKS’ products, product mix, the timing of customer orders and
deliveries, the impact of competitive products and pricing, and
difficulties with integrating acquired businesses. The “forward-looking
statements” contained herein speak only as of the date on which they are
made, and JAKKS undertakes no obligation to update any of them to
reflect events or circumstances after the date of this release.

JAKKS Pacific, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
September 30, December 31,
2016 2015
(In thousands)
Current assets:
Cash and cash equivalents $ 45,475 $ 102,528
Restricted cash 2,687
Accounts receivable, net 272,257 163,387
Inventory, net 75,064 60,544
Income taxes receivable 23,435 24,008
Prepaid expenses and other   27,761     31,901  
Total current assets 446,679 382,368
Property and equipment 125,422 112,088
Less accumulated depreciation and amortization   102,724     93,653  
Property and equipment, net 22,698 18,435
Goodwill 43,462 44,199
Trademarks & other assets, net 40,284 47,618
Investment in DreamPlay, LLC   7,000     7,000  
Total assets $ 560,123   $ 499,620  
Current liabilities:
Accounts payable and accrued expenses $ 159,935 $ 89,067
Reserve for sales returns and allowances 16,379 17,267
Income taxes payable   22,791     21,067  
Total current liabilities 199,105 127,401
Long term debt, net 207,933 209,166
Other liabilities 5,210 5,155
Income taxes payable 2,325 2,199
Deferred tax liability   2,265     2,293  
Total liabilities 416,838 346,214
Stockholders’ equity:
Common stock, $.001 par value 20 21
Additional paid-in capital 177,326 194,743
Treasury stock (24,000 ) (28,322 )
Retained earnings (accumulated deficit) 5,437 (3,391 )
Accumulated other comprehensive loss   (16,077 )   (10,051 )
Total JAKKS Pacific, Inc. stockholders’ equity 142,706 153,000
Non-controlling interests   579     406  
Total stockholders’ equity   143,285     153,406  
Total liabilities and stockholders’ equity $ 560,123   $ 499,620  
Working Capital $ 247,574   $ 254,967  
JAKKS Pacific, Inc. and Subsidiaries
Third Quarter Earnings Announcement, 2016
Condensed Statements of Operations (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015
(In thousands, except per share data) (In thousands, except per share data)
Net sales $ 302,791 $ 337,027 $ 539,577 $ 582,334
Less cost of sales
Cost of goods 159,127 181,191 286,120 317,030
Royalty expense 43,296 46,752 73,829 79,066
Amortization of tools and molds   5,435     4,755     8,712     7,244  
Cost of sales   207,858     232,698     368,661     403,340  
Gross profit 94,933 104,329 170,916 178,994
Direct selling expenses 23,547 22,725 43,998 38,826
Selling, general and administrative expenses 34,203 34,352 99,236 95,771
Depreciation and amortization   2,770     2,624     8,185     6,976  
Income from operations 34,413 44,628 19,497 37,421
Other income (expense):
Income from joint ventures 60 861 1,744
Other income 207 5,642 282 5,642
Interest income 12 16 46 51
Interest expense   (3,020 )   (3,107 )   (9,466 )   (9,187 )
Income before provision for income taxes 31,612 47,239 11,220 35,671
Provision for income taxes   1,083     1,375     2,219     3,115  
Net income 30,529 45,864 9,001 32,556
Net income (loss) attributable to non-controlling interests   (83 )   19     173     (28 )
Net income attributable to JAKKS Pacific, Inc. $ 30,612   $ 45,845   $ 8,828   $ 32,584  
Earnings per share – basic $ 1.91   $ 2.47   $ 0.53   $ 1.72  
Shares used in earnings per share – basic   16,044     18,559     16,561     18,929  
Earnings per share – diluted $ 0.82   $ 1.12   $ 0.36   $ 0.89  
Shares used in earnings per share – diluted   39,504     42,562     39,916     42,737  
JAKKS Pacific, Inc. and Subsidiaries
Reconciliation of Adjusted EBITDA (Unaudited)

Reconciliation of GAAP to Non-GAAP measures:


This press release and accompanying schedules provide certain
information regarding Adjusted EBITDA, which may be considered
non-GAAP financial measures under the rules of the Securities and
Exchange Commission. The non-GAAP financial measures included in
the press release are reconciled to the corresponding GAAP
financial measures below, as required under the rules of the
Securities and Exchange Commission regarding the use of non-GAAP
financial measures. We define Adjusted EBITDA as income (loss)
from operations before depreciation, amortization and adjusted for
certain non-recurring charges incurred, primarily related to
reorganization expenses and certain non-cash charges for
restricted stock compensation expense. Adjusted EBITDA is not a
recognized financial measure under GAAP, but we believe that it is
useful in measuring our operating performance. We believe that the
use of the non-GAAP financial measure Adjusted EBITDA enhances an
overall understanding of the Company’s past financial performance,
and provides useful information to the investor by comparing our
performance across reporting periods on a consistent basis and the
use of Adjusted EBITDA by other comparable companies as a measure
of performance.


Investors should not consider these measures in isolation or as
a substitute for net income, operating income, or any other
measure for determining the Company’s operating performance that
is calculated in accordance with GAAP. In addition, because these
measures are not calculated in accordance with GAAP, they may not
necessarily be comparable to similarly titled measures employed by
other companies.


Three Months Ended

September 30,

Nine Months Ended

September 30,

Full Year


Twelve Months


December 31,

2016 2015 2016 2015 2016 2015
(In thousands) (In thousands) (In thousands) (In thousands)
Net income $ 30,529 $ 45,864 $ 9,001 $ 32,556 $ 15,313 $ 23,170
Income from joint ventures (60 ) (861 ) (1,744 ) (861 ) (2,761 )
Other income (207 ) (5,642 ) (282 ) (5,642 ) (282 ) (5,642 )
Interest income (12 ) (16 ) (46 ) (51 ) (62 ) (62 )
Interest expense 3,020 3,107 9,466 9,187 12,666 12,402
Provision for income taxes 1,083 1,375 2,219 3,115 3,321 3,423
Depreciation and amortization 8,205 7,379 16,897 14,220 21,283 18,860
Restricted stock compensation expense   170     507     1,254     1,451     1,622     1,559  
Adjusted EBITDA $ 42,788   $ 52,514   $ 37,648   $ 53,092   $ 53,000   $ 50,949  


JAKKS Pacific
Sara Rosales
Montalvo, 424-268-9363
Senior Vice President, Communications
Bennett, 310-455-6210
Executive Vice President / CFO
McGowan, 949-574-3860
Managing Director